Busted! Joburg man catches Standard Bank out over securitisation denial
Sometimes the banks just can’t get it right. Here’s a case where Standard Bank’s legal department flatly denied a customer’s mortgage loan had been securitised, while another department in the same bank sent proof that the loan had in fact been sold to an entirely different legal entity.
Busted. That’s what happens when the left hand doesn’t know what the right hand is doing.
What makes this case even more interesting is that the customer, Jack Darier of Parkhurst in Johannesburg, does not have a judgment against his name, nor is his house under threat of being repossessed. He just wanted to know if his home loan had been securitised – in other words, on-sold by the bank to a new owner. That means the bank no longer has legal standing to bring action against the customer in the event of default. You can see below how the banks get around this – it’s a simple cession, they argue successfully in our brain dead courts.
So let’s ignore the blather of the R50,000-a-day silks who show up daily in our courts as they repossess upwards of 10,000 homes each year (and for which the SA Communist Party is now calling for an official investigation), and go straight to the law books: Regulation 35 of the Banks Act covers the sale of a loan to a third party by way of securitisation. A debt on-sold to a “Special Purpose Vehicle” is considered a sale (not a cession) under which the full entitlement, rights and obligations are conveyed to the purchaser. Regulation 35 furthermore blocks the public from gaining access to securitisation transactions, which are deemed to be “off balance sheet”.
The reason banks securitise is to move assets off balance sheet and so free up capital for further lending. The provisioning requirements of the Basel accords, which govern banking internationally, means banks have to set aside capital according to the type and risk of loans it makes. So if it can move these off balance sheet by way of securitisation, it’s a case of rinse and repeat – issue a bunch of new mortgage loans, bundle them together, and sell them off to investors. Great business if you can get it. If the mortgage lender defaults, there are various insurance policies and credit default swaps (CDSs) that make up the shortfall. A zero-sum game for the banks. But not if you are the home owner. If the home owner defaults, the bank will get judgment, sell the house at auction for a fraction of its value, and then pursue the hapless defaulter for the shortfall.
In law, that’s called undue enrichment. Or selling the same asset twice.
A securitisation is therefore not a cession, but a shift in ownership of the underlying asset. The problem is no defaulting home owner can afford the R50,000-a-day silk to argue this convincingly in court. So the charade goes on. Section 72 read with Section 1 of the Banks Act precludes a bank from participating in any business wherein it may unduly influence and/or place at risk its providential requirements or burden its liquidity requirements. So an SPV cannot be a division or associated entity of the bank. The SPV must be an independent juristic entity.
But let’s get back to Darier’s to-and-fro discussion with Standard Bank. When he found out his mortgage loan had been securitised – despite the bank’s bare denial – he went along to visit the commercial crimes unit in Johannesburg. There he laid a charge of fraud against the bank.
Despite having presented evidence of the securitisation along with his correspondence and affidavit and receiving a case number, no further action was taken by the police investigation unit.
Darier’s interest in the matter all started when his father ran into difficulty with the bank some years ago. He fired off a bunch of questions to Standard Bank asking whether his mortgage bond had been securitised.
No it had not, said the bank (you can see the correspondence below). But then another division from the same bank sent him a Certificate of Balance showing the mortgage loan was now owned by Blue Granite. This is a securitisation vehicle used by Standard Bank into which it has placed thousands of its loans.
Bear this in mind when reading what followed.
In mid-July this year Darier sent off a standard set of questions that New Economic Rights Alliance (New Era) advises clients to put to their banks.
Here’s the response from Joop Dekker, executive in charge of complaints resolution at Standard Bank, sent on 24 July 2015:
We refer to your note below and would like to reply as follows:
Regarding the questions you have posed below we are of the view that your questions are inappropriate.
The bank does engage in the process of securitization and there is nothing untoward or illegal about this.
It seems that you are being misled by New Era and we note that your question is identical to those that New Era have been inviting people to ask.
The bank has been involved in litigation with this entity and we attach hereto a copy of the latest judgement herein. We draw your attention to paragraphs 24 and 25 where the honourable Judge Baqwa described the NEW Era’s action as vexatious. You will also note that legal cost had been awarded against the New Era directors in person.
Lastly we confirm that any failure on the bank’s side to specifically reply to your question below cannot be construed as an admission to the correctness thereof.
We therefore trust that the above clarifies the matter from the bank’s side.
To which Darier replied on 25 July 2015:
However, my response is as follows:
1. I am not surprised the bank finds these question “inappropriate” because they do not want their customers and the public to have an insight into their dubious banking practices. Just because they deem it inappropriate does not infer that there are inappropriate questions to ask.
2. It seems to me that your bank and most likely all the banks underestimate the intelligence of the public and they are trying to pull the wool over people’s eyes. Your executives are a bastion of CA’s and financial professionals who seem to think they are far more intelligent than everyone else and no-one will be the wiser. This may the case in other instances but I can assure you this is not the case now.
3. With regards to the legality of securitisation: you are 100% correct. The process of securitisation (ie. selling promissory notes/loan agreements to third parties for purposes of using as investment vehicles to invest in stocks) is legal. However, there is no mention of the fact that after ceding the loan agreement to a party without notification to the debtor the banks’ rights to repossess houses are null and void. The bank is thus merely acting as the agent for the third party in retrieving monies owed. I see on the website there is but 2 or 3 lines (mentioning) securitisation but there has been a convenient omission of any information which would allude the fact that the bank has no more rights for repossession.
4. I have been influenced by New Era, however I do not deem them as misleading me. The fact you have not been willing to answer my questions is testament to the fact that the bank does not want to draw attention to the matter or reveal the shady practices. If the bank wasn’t doing anything wrong they wouldn’t find the questions “inappropriate”. New Era indicated that the bank would not divulge any details on this matter.
5. Securitisation has been banned in the US for the reasons that is shady and it has resulted in a plethora of illegal foreclosures (No. There have been calls for the outlawing of securitisation in the US, but it is not banned – Ed).
6. I assume that because the manner in which securitisation works, it can be utilised in any form of loan/credit agreement (home loans, car finance, credit cards, etc). It would fantastic if the banks and third parties undertook profit shares with the debtor as they are using money which has not been paid to them yet to create profits. They are essentially utilising the hard work and income of their customers to generate massive profits for themselves
7. I am well aware of what vexatious litigation and proceeding are. I examined the document and it was considered vexatious due to the manner in which the litigation was undertaken. It actually has nothing to do with the legitimacy of accusations or the matter on hand and the legality of the bank repossessing houses when it has no right to.
8. New Era have successfully won cases against the bank and you and I both know this (They certainly educated the public, and in doing so frustrated the banks in their attempts to repossess homes, but New ERA does not fight cases for individuals – Ed).
The response does not clarify the matter at all. That being said we can drop the matter on the premise that I assume that my home loan has been securitised and that I am aware the bank has no right to repossess it.
I will be engaging with New Era and volunteering my time and services for free.
On 28 July, Joop Dekker of Standard Bank provided the following reply:
We confirm that Home loan account number 364814497 has, according to the bank’s records, not been securitized.
Furthermore we will have to agree to disagree on our respective views regarding New ERA’s position, which entity has taken on the banking industry (including the SA Reserve Bank) during the past few years via the Courts, and has had no success whatsoever.
Hypothetically if your homeloan had been securitized, and due to arrears on the account the bank foreclosed on the loan, the homeloan would merely be ceded back to the bank (by the special purpose vehicle) and the bank’s normal legal and collections process would subsequently been followed.
So what we have here is a serious dispute of fact: Dekker’s denial of securitisation, and Darier’s inadvertent receipt of proof suggesting otherwise. Based on standards of evidence, it looks like Darier has made his point. The bank's position is that even if the loan is securitised, it can simply re-cede it back from the SPV and continue with the normal collections process. In theory this is fine, except that per our reading of the law as per the above, you cannot reverse an outright sale with a simple cession.
But Darier was just getting started. He then fired off a letter to the Northern Provinces Law Society, asking what it was doing to investigate lawyers implicated in drafting dodgy securitisation agreements.
Proof of many instances of this shady practice are available AND local attorneys and law societies can no longer claim they do not know what securitisation is and overlook the matter.
The attorneys have presented papers to the court which are untruthful and indicate the bank still has locus standi on properties lodged as surety when in fact they don’t. These attorneys are well aware of this and are essentially lying to judges and are actively committing fraud and being complicit to the fraudulent practice.
I would like to discuss this with the law society to understand their views and positions on this as I am sure the securitisation matter has arisen before and the fact that attorneys are still being given free reign to present fraudulent papers to the courts is tantamount to one of the following 2 scenarios: a) either the law society is completely oblivious to this matter and more study and education of the subject in-house is required, or b) the law society has knowledge of this unlawful practice but is allowing it to continue as it represents a great value of business for the local legal system and practitioners (ie. You are complicit to the fraud and deception in court)
I am not working with New Era and I think it would be in the best interests of the law society to meet with me to discuss further as there may be calls for disbarring of many lawyers who are implicated in this scheme.
Also, another matter I am going to be addressing is how certain firms are structuring the securitisation contracts and legal framework on the JSE in a manner which they are aware is not legal as they knowingly create shell investment schemes. They are structuring in a manner which directly contravenes numerous banking and credit act subsections/clauses and they are structuring in a manner such that properties are not transferred at the deeds office to the entity to whom credit agreements and the physical assets have been ceded to. The sole purpose being so that if a customer defaults the bank can approach the courts and pretend to be legal creditor. They are knowingly advising banks to create shell investment schemes.
Surely the local law societies are aware of this practice or they need to start introducing formal education and study into these matters.
The Law Society has requested a meeting with Darier over the matter. We'll keep you posted.
Adv Douglas Shaw comments as follows on Darier's points to Standard Bank above:
A securitisation IS a cession, which is what is necessary to shift the ownership of the asset, the asset being the bond, a real security right.
Its not a mere cession “in debiti” which might not involve the change in ownership, but it is a cession. Thus it must show up in the deeds registry.
Securitisation has not been banned in the US.
Point 7 is a very good one!
Point 8, not so sure!
If (the bank) recedes it back then both must show in the Deeds registry .
I’d be happy to attend that meeting with the law society.
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